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 Contents

Step 4: Calculating Federal Taxes Owing 77 Interest-Earning Chequing Accounts 129

Step 5: Calculating Net Federal Tax 78 Canada Savings Bonds 129
Making Tax Payments 81 Evaluting Savings Plans 130
Deadlines and Penalties 83 Rate of Return 130
Stephanie Seymour's 2007 Federal Tax Return 88 Inflation 131
Tax-Planning Strategies 91 Tax Considerations 131
How Should You Receive Income? 91 Liquidity 131
Tax-Free Savings Account 92 Safety 131
Example 93 Restrictions and Fees 132
Maximizing the Benefit of Deductions and Selecting Payment Methods 132
Tax Credits 94 Types of Chequing Accounts 132
Tax-Deferral Techniques 96 Evaluating Chequing Accounts 133
Income-Splitting Techniques 97 Other Payment Methods 134
Ensuring That Your Portfolio Is Tax-Efficient 99
Summary of Learning Objectives 137
Tax Issues Important to Students 99
Key Terms 137
Changing Tax Strategies 99
Key Formulas 137
Tax Assistance and the Audit Process 101 Financial Planning Problems 138
Tax Information Sources 101 Financial Planning Activities 138
Tax Preparation Software and Electronic Filing 102 Life Situation Case 1 139
Tax Preparation Services 103 Life Situation Case 2 139
What if Your Return Is Audited? 103
Appendix 4-Using a Chequing Account 140
Summary of Learning Objectives 106
Key Terms 107
Financial Planning Problems 107 Chapter 5-Introduction to
Financial Planning Activities 107 Consumer Credit 143
Life Situation Case 108 What Is Consumer Credit? 144
Continuous Case for Part 1 109 Consumer Credit in Our Economy 144
Appendix 3-Stephanie's 2007 Ontario Uses and Misuses of Credit 145
Tax T1 General Return 110 Advantages of Credit 145
Disadvantages of Credit 146
Summary: Advantages and Disadvantages
of Credit 147
Types of Credit 147
MANAGING YOUR Consumer Loans 147
Revolving Credit 147
PERSONAL FINANCES Costs Associated with Credit Cards 150
Benefits of Credit Cards 150
Chapter 4---The Banking Services
Steps to Follow when a Credit Card Is Stolen 150
of Financial Institutions 116 Protecting Yourself against Debit/ Credit Card
A Strategy for Managing Cash 117 Fraud 150
Meeting Daily Money Needs 117 Consumer Loans 154
Types of Financial Services 118 Measuring Your Credit Capacity 158
Electronic Banking Services 118 Can You Afford a Loan? 158
Methods of Payment 120 General Rules of Credit Capacity 158
Opportunity Costs of Financial Services 120 GDS and TDS Ratios 159
Financial Services and Economic Conditions 120 Co-Signing a Loan 159
Types of Financial Institutions 121 Building and Maintaining Your Credit Rating 160
Deposit- Type Institutions 122 Applying for Credit 166
Non- Deposit Institutions 123 A Scenario from the Past 166
Online Banking 124 What Creditors Look For: The Five Cs of Credit
Comparing Financial Institutions 126 Management 166
Types of Savings Plans 128 FICO and VantageScore 168
Regular Savings Accounts 128 How Can I Improve My Credit Score? 169
Term Deposits and Guaranteed Investment What if Your Application Is Denied? 170
Certificates (GICs) 128
Contents vii

Avoiding and Correcting Credit Mistakes 170 Step 2: Find and Evaluate a Property to
In Case of a Billing Error 171 Purchase 213
Identity Crisis: What to Do if Your Identity Is Step 3: Price the Property 214
Stolen 171 The Finances of Home Buying 216
Summary of Learning Objectives 173 Step 4: Obtain Financing 216
Key Terms 173 Step 5: Close the Purchase Transaction 220
Financial Planning Problems 173 Home Buying: A Final Word 222
Financial Planning Activities 174 Selling Your Home 223
Life Situation Case 175 Preparing Your Home for Selling 223
Determining the Selling Price 223
Chapter 6-Choosing a Source Sale by Owner 223
Listing with a Real Estate Agent 224
of Credit: The Costs of Credit
Alternatives 176 Summary of Learning Objectives 224
Key Terms 225
Sources of Consumer Credit 177 Key Formulas 225
What Kind of Loan Should You Seek? 177 Financial Planning Problems 225
The Cost of Credit 180 Financial Planning Activities 226
The Effective Cost of Borrowing 180 Life Situation Case 1 227
Tackling the Trade-offs 181 Life Situation Case 2 227
Calculating Your Loan Payments 183 Continuous Case for Part 2 (B) 228
Financial Planning Calculations 185
Credit Insurance 187
Managing Your Debts 188
Warning Signs of Debt Problems 188
The Serious Consequences of Debt 189
Consumer Credit Counselling Services 190 INSURING YOUR ASSETS
Declaring Personal Bankruptcy 191 Chapter 8-Home and Automobile
Fending Off Bankruptcy: Consolidation Loans 191 Insurance 230
Bankruptcy and Insolvency Act 192
Insurance and Risk Management:
Effects of Bankruptcy on Future Credit 193
An Introduction 231
Summary of Learning Objectives 194 What Is Insurance? 231
Key Terms 195 Types of Risks 231
Key Formulas 195 Risk Management Methods 232
Financial Planning Problems 195 Planning an Insurance Program 233
Financial Planning Activities 196
Property and Liability Insurance 236
Life Situation Case 197
Potential Property Losses 236
Continuous Case for Part 2 (A) 198
Liability Protection 236
Principles of Home and Property Insurance 237
Chapter 7-The Finances of Homeowners Insurance Coverages 237
Housing 199 Tenants Insurance 240
Evaluating Housing Alternatives 200 Home Insurance Types 241
Your Lifestyle and Your Choice of Housing 200 Exclusions 242
Opportunity Costs of Housing Choices 200 Home Insurance Cost Factors 242
Renting versus Buying Housing 201 Deductibles 242
Housing Information Sources 202 How Much Coverage Do You Need? 243
Renting 203 Factors That Affect Home Insurance Costs 244
Selecting a Rental Unit 203 Reducing Home Insurance Costs 245
Advantages of Renting 203 Automobile Insurance Coverages 246
Disadvantages of Renting 205 Motor Vehicle Coverages 247
Costs of Renting 206 Other Automobile Insurance Coverages 248
Renting Rights 206 Automobile Insurance Costs 249
The Home-Buying Process 206 Amount of Coverage 249
Step 1: Determine Home Ownership Needs 206 Automobile Insurance Premium Factors 249
viii Contents

High-Risk-Driver Insurance 251 Determining Your Disability Income Insurance

Reducing Automobile Insurance Premiums 251 Requirements 279
Summary of Learning Objectives 252 Critical Illness Insurance 279
Key Terms 253 Supplemental Health Insurance 281
Financial Planning Problems 253 Dental Expense Insurance 281
Financial Planning Activities 254 Vision Care Insurance 281
Creating a Financial Plan 254 Health Services Insurance 281
Life Situation Case 255 Travel Insurance 281
Accidental Death or Dismemberment Insurance 282
Chapter S-Life, Health, and Long-Term-Care Insurance 282
Disability Insurance 256 Major Provisions in a Health Insurance Policy 283
Health Insurance Trade-offs 284
Life Insurance: An Introduction 257 Health-Care Expenditures in Canada 284
What Is Life Insurance? 257
Health Information Online 285
The Purposes of Life Insurance 258
The Principle of Life Insurance 258 Summary of Learning Objectives 285
Key Terms 286
Determining Your Life Insurance Needs 260 Financial Planning Problems 286
Do You Need Life Insurance? 260 Financial Planning Activities 287
Determining Your Life Insurance Objectives 261 Creating a Financial Plan 288
Estimating Your Life Insurance Requirements 261 Life Situation Case 289
Types of Life Insurance 262 Continuous Case for Part 3 290
Term Life Insurance 262
Permanent Life Insurance 264
Other Types of Life Insurance Policies 267
Important Provisions in a Life Insurance
Contract 268
Naming Your Beneficiary 268 INVESTING YOUR FINANCIAL
The Grace Period
Policy Reinstatement
268
268
RESOURCES
Non-Forfeiture Clause 268 The Pillaging of America:
Incontestability Clause 269 October 2008 292
Suicide Clause 269
Automatic Premium Loans 269 Chapter 10--Fundamentals of
Misstatement of Age Provision 269 Investing 293
Policy Loan Provision 269 Preparing for an Investment Program 294
Riders to Life Insurance Policies 270 Establishing Investment Goals 294
Buying Life Insurance 271 Performing a Financial Checkup 295
From Whom to Buy? 271 Getting the Money Needed to Start an
Comparing Policy Costs 271 Investment Program 296
Obtaining a Policy 272 The Value of Long- Term Investment Programs 297
Examining a Policy 273 Factors Affecting the Choice of Investments 299
Choosing Settlement Options 273 Safety and Risk 299
Switching Policies 273 Investment Income 303
Health Insurance and Financial Planning 274 Investment Growth 304
What Is Health Insurance? 274 Investment Liquidity 304
The Need for Supplemental Health Insurance 274 An Overview of Investment Alternatives 305
Group Health Insurance 275 Stock or Equity Financing 305
Individual Health Insurance 275 Corporate and Government Bonds 306
Supplementing Your Group Insurance 276 Mutual Funds 306
Disability Income Insurance 276 Segregated Funds 307
Definition of Disability 276 Rea/Estate 307
Disability Insurance Trade-offs 277 Securitized Debt Instruments 308
Sources of Disability Income 277 Process 308
Other Investment Alternatives 309
Contents

Summary of Factors That Affect Investment Commission Charges 351

Choices 309 Securities Regulation 352
A Personal Investment Plan 310 Long-Term and Short-Term Investment
Factors That Reduce Investment Risk 313 Strategies 353
The Role of a Financial Planner 313 Long- Term Techniques 353
Your Role in the Investment Process 314 Private Equity 354
Tax Considerations 315 Short- Term Techniques 355
Sources of Investment Information 319 Hedge Funds 358
The Internet and Online Computer Services 319 Summary of Learning Objectives 358
Newspapers and News Programs 319 Key Terms 359
Business Periodicals and Government Key Formulas 360
Publications 320 Financial Planning Problems 360
Corporate Reports 320 Financial Planning Activities 361
Statistical Averages 321 Creating a Financial Plan 362
Investor Services and Newsletters 321 Life Situation Case 362
Desktop Information Services 322
Summary of Learning Objectives 323 Chapter 12-Investing in Bonds 363
Key Terms 323 Characteristics of Corporate Bonds 364
Key Formulas 323
Why Corporations Sell Corporate Bonds 366
Financial Planning Problems 324
Types of Bonds 366
Financial Planning Activities 324
Convertible Bonds and Bonds with Warrants 367
Creating a Financial Plan 325
Provisions for Repayment 367
Life Situation Case 326
Other Types of Bonds 368
Why Investors Purchase Corporate Bonds 369
Chapter 11-lnvesting in Stocks 327 Stocks Always Beat Bonds: Myth or Fact? 369
Common Stocks 328 Interest Income 370
How Are the Markets Doing? 328 Changes in Bond Value 370
Why Corporations Issue Common Stocks 330 Bond Repayment at Maturity 371
Why Investors Purchase Common Stocks 331 Comparing Bonds to GICs 371
Preferred Stocks 333 A Typical Bond Transaction 372
The Cumulative Feature of Preferred Stocks 334 The Mechanics of a Bond Transaction 373
The Participation Feature of Preferred Stocks 334 Government Bonds and Debt Securities 374
The Conversion Feature of Preferred Stocks 335 Types of Bonds 374
Evaluation of a Stock Issue 335 Provincial Government Securities and
Stock Valuation 336 Guarantees 377
Classification of Stock Investments 336 Municipal Bonds/Instalment Debentures 378
How to Read the Financial Section of the High- Yield Bonds 378
Newspaper 338 The Decision to Buy or Sell Bonds 379
The Internet 339 Annual Reports 380
Stock Advisory Services 339 The Internet 380
Corporate News 342 Bond Ratings 380
Factors That Influence the Price of a Stock 343 Bond Yield Calculations 382
Measures of Corporate Risk, Performance, Other Sources of Information 384
and Shareholders' Returns 344 Summary of Learning Objectives 385
Buying and Selling Stocks 347 Key Terms 386
Primary Markets for Stocks 347 Key Formulas 386
Secondary Markets for Stocks 348 Financial Planning Problems 387
Brokerage Firms and Account Executives 349 Financial Planning Activities 388
Should You Use a Full-Service or a Discount Creating a Financial Plan 389
Brokerage Firm? 349 Life Situation Case 390
Types of Stock Orders 350 Appendix 12-Market Interest Rates
Computerized Transactions 351 and Bond Pricing 391
 Contents

Chapter 13-lnvesting in Mutual Planning Your Retirement Housing 429

Funds 393 Type of Housing 429
Avoiding Retirement Housing Traps 430
Why Investors Purchase Mutual
Funds 394 Planning Your Retirement Income 431
Characteristics of Mutual Funds 395 Public Pensions 431
Management Fees and Other Charges 399 Employer Pension Plans 434
Management Expense Ratio 399 Personal Retirement Plans 436
Special Fees 399 Will You Have Enough Money during
Retirement? 443
Classifications of Mutual Funds 402
Living on Your Retirement Income 443
How to Make a Decision to Buy or Sell Tax Advantages 443
Mutual Funds 404 Working during Retirement 443
How to Read the Mutual Funds Section of 444
Investing for Retirement
the Newspaper 405 Dipping into Your Nest Egg 444
Financial Objectives-Again 405
Mutual Fund Prospectus 406 Summary of Learning Objectives 445
Mutual Fund Annual Report 407 Key Terms 446
Financial Publications 407 Financial Planning Problems 446
The Internet 407 Financial Planning Activities 447
Creating a Financial Plan 447
The Mechanics of a Mutual Fund
Life Situation Case 448
Transaction 409
Return on Investment 409 Chapter 15---Estate Planning 449
Taxes and Mutual Funds 410
Purchase Options 412 Why Estate Planning? 450
Withdrawal Options 413 What Is Estate Planning? 450
Provincial Family Law 451
Summary of Learning Objectives 414 451
The Opportunity Cost of Rationalizing
Key Terms 414
Key Formulas 414 Legal Aspects of Estate Planning 452
Financial Planning Problems 415 Wills 453
Financial Planning Activities 415 Types and Formats of Wills 455
Creating a Financial Plan 416 Writing Your Will 455
Life Situation Case 417 Specific Requirements for a Will 459
Continuous Case for Part 4 418 Altering or Rewriting Your Will 459
A Living Will 460
Ethical Will 461
Letter of Last Instruction 461
Types of Trusts and Estates 462
Types of Trusts 462
464
CONTROLLING YOUR Pros and Cons of a Trust
Estates 464
FINANCIAL FUTURE Estate Assets Not Distributed by a Will 465
Settling Your Estate 465
Chapter 14-Retirement Planning 420
Summary of Learning Objectives 467
Why Retirement Planning? 421 Key Terms 468
Tackling the Trade-offs 422 Financial Planning Activities 468
The Importance of Starting Early 422 Creating a Financial Plan 469
The Basics of Retirement Planning 423 Life Situation Case 469
Conducting a Financial Analysis 423 Continuous Case for Part 5 470
Review Your Assets 424
Glossary 471
Retirement Living Expenses 425
Adjust Your Expenses for Inflation 428 Index 477
THE BOOK AND REALITY
In 2008, as we went to press, the world's stock exchanges were spiralling downward, stripping
asset values in the trillions of dollars. It was a tumultuous period of anxiety and uncertainty.
Today, while there is less drama in the equity markets, uncertainty remains as the number one
issue on the minds of most people in the world. Although to a lesser degree than in 2008 and
2009, Governments continue to intervene and inject liquidity to keep markets functioning. A
number of revered institutions continue to be revalued across industries. Additionally, numerous
forecasters have continued to suggest that Canada is ripe for a real-estate correction, with some
prognosticators suggesting adjustments in the magnitude of 30% in some Canadian markets.
While these extraordinary times are now the new normal, we recognize that the problem of
excessive debt and the corrosive impact ofborrowed money have not been resolved. In fact, with
interest rates in Canada at a continued all-time low, some suggest the problem is only getting
worse. To provide context to the economic woes that continue, we explore the implications of
the world's financial crisis in two articles. First, the article The Greatest Speculative Bubble in
History?, at the end of the preface, offers perspective on the continuing crisis by "myth-busting"
some of the scenarios that led to the current economic mess. Second, The Pillaging of America
introduces Part 4: Investing Your Financial Resources, and provides a context to the chapters
within that section. While we do not pretend to have the right answers in this historic drama
unfolding in economies around the world, we invite you to join us in asking difficult questions
and helping each other adapt to the new emerging realities in the money, banking, consumer,
and investment markets.
Families around the world are continuing to react in disbelief to the changes in the value of
their savings and investments as pension, insurance, and retirement funds are implicated. It is
in this climate of change when personal financial management is more important than ever. In
the following sections, we share our pedagogical approach, content design, and learning
resources to help you meet your challenges and to ensure an exciting journey of discovery in the
world of personal finance.

VARIETY MAKES FOR A RICH LEARNING

ENVIRONMENT
A mosaic emerges when its pieces fit together and when the whole exceeds the sum of its
parts. We recognize that students have different learning styles and that a textbook can have
features that appeal to these differences and help students understand and apply concepts.
Beyond informing our readers, in writing this textbook we want to encourage students to raise
important questions that require further investigation. As well, we decided to limit coverage to
15 chapters grouped within five sections so that we could provide sufficient depth without pre-
suming to give the "last word" on each topic.
Thus, we took on the following triple challenge in revising each chapter for this edition.
First, each chapter must qualify as being learner-centred and provide examples and situations
students can easily relate to. Second, multiple perspectives must raise the bar of content so that
the students begin to ask good questions and not simply accept material as prescription. Third,
learning depends on the organization of material so that important concepts stand out and are
reinforced in as many different contexts as possible.
xii Preface

UPDATED CONTENT
There are numerous changes, updates, and new exhibits in this edition. The reader might find
the following highlights especially useful:
Chapter I: Additional questions and examples on financial planning.
Chapter 2: Updated information on creating personal budgets and personal financial
planning.
Chapter 3: Updated information on Tax-Free Savings Accounts, new information on the treat-
ment of dividends for tax purposes, revised tax rates, tax scam warnings, and recent tax law
changes for planning a tax strategy and filing an income tax return.
Chapter 4: Enhanced discussion on the higher costs of financial services, revised analysis of
interest rates using current market conditions, and examples of using online banking features
such as email money transfers.
Chapter 5: Details as to how the over-use of credit led to the Great Recession, more on credit
card fraud, costs, features, and benefits; and policies for fraudulent charges, including Canadian
scores equivalent to the U.S. FICO and VantageScore and details about newly enacted legislation
to limit how much people can borrow against their homes.
Chapter 6: Update of information on bursaries and student loans such as the Ontario Student
Assistance Program (OSAP) and a new article detailing how high interest rates are costing
Canadians a lot of money.
Chapter 7: New information on additional types of mortgages and qualifications and changes to
mortgage rules in Canada, do-it-yourself mortgages, prepayment options and penalties regard-
ing refinancing, inclusion of a sample real estate purchase agreement, and an overview of
renting versus buying.
Chapter 8: Updated information on errors and omissions in insurance and underlying factors
affecting auto insurance and information on how recent natural disasters in Canada have
impacted the insurance industry and policy holders.
Chapter 9: Revised information on life insurance fees and Canada's national health care
expenditures.
Chapter 10: Update on new rules affecting income trusts and exemptions for REITs; an
update on Canadian investment trends, a deeper understanding of risk related to lack of
transparency, conflicts of interest with ratings agencies, boards of directors, and executive
focus on short-term profits.
Chapter 11: Updated information on hedge funds and private equity, information about
revised tax treatment of certain stock transactions, as well as links and exhibits that will help
the reader evaluate a corporation's stocks and whether one should use a full-service or discount
broker, including a revised fee guide associated with using online discount brokers.
Chapter 12: Updated information on sample bond transactions, current bond yields, real return
bonds, details of the single-largest bond issuance in Canadian history, and why bond valuation is
important for increasing the number of investors who buy bonds.
Chapter 13: Revised coverage of current mutual fund characteristics and mutual fund return
rates through 2013.
Chapter 14: Revised information on types of pension plans, including details of recent
changes to both CPP and OAS, defined benefit pension plans, pension adjustments (PA),
pension adjustment reversals (PSPA) , and past service pension adjustments (PAR) .
Chapter 15: Updated information on the minimum requirements of a will and the characteristics
of ethical wills, and more information on estate planning strategies.

Money Management Strategy:
Financial Statements and Budgeting
LEARNING OBJECT IVES
1-.0f Recogniu relationships among financial documents and money ~ru~mgement activities.
/...0'2- Cre<~teasystemforrnaintainingpersonalfuuncial,.,cords.
t._Q1. Devdopaf'<'rsonalbalancc.shedandcashfiowstatement.
t._O'f Create and implement a budgd.
1-.0s- Calculate savings needed to achieve financial goah
" WE SPENT HOW MUCH ON W HAT? "
" Herewegoagain," complained Ben "Every time we try
toust a budget,weenduparguing andstiUdon'thave
enough money:'
Yolanda~iM, "Maybtifwoktpl track of """)'thing we
sptnd we would havt some idea of wht"' our monoy gots."
"No.notthat!"Benaclaimed. "Ihaveafriendwho
LEARNING OBJECTIVES structure the
chapter, and each objective is repeated in the
margin at the appropriate point in the main
body of the chapter. The Learning Objectives
appear again in the summary at the end of the
chapter and are used to organize end-of-chapter
questions, problems, and exercises, as well as
materials in the Instructor's Manual and the
Test Bank.
CHAPTER OPENING CASES describe
a situation that the learner will face or is currently
facing. A case begins each chapter's discussion by
presenting a problem, dilemma, or circumstance
that clearly needs immediate attention. The
questions accompanying the case correspond to
the sequence of the chapter's contents and link
procedures that may otherwise seem unrelated.
$L650 and donated $1,800 to the homeleS5 shdter and
church. Thostarethingswehadtodoandwantedtodo."
Yolanda roplied. " But now that we know how wupend
our money. what do we do nut1"
" Maybt we ihould get a computerized money manag!'-
mentprogram,"lknsuggested.
LEARNING OBJECTIVES
t.,O( Recognize relationships among financial docwnents and money management activities.
/.,02- Create a system for maintaining personallinandal rerordo.
t.,O'i ~lop a personal balance. shut and cash flow statement
t...O'f- Createandimplementabudget.
/.,0,- Calculatesaving•nudedtoachievefinancialgoals.
'"WE SPENT HOW MUCH ON WHAT?"'
1.,0( /.,O'i- DeY~op a poon.oMII>alan<esheetand<ashllow
and
Re<ogni •• ,.,.ationshil)<among finandaldo<ument<
moneymanagementarti.;ti~s.
Succ....fulmon<ymanag<m<nlr<quira<lf..:tiv<roordination Ar<r><>nalbalanaoh<rl.al><>lmownuon<lwurthotol<m<nl,
ofr<r><>nalfin:mcialr<rord..p<roonalfinancialnotrn~<nt>,ond i• pr<par«<byliotingoll ~<m>ofvaln< (o...u)ond.Uomounu
ow«<tooth<n(liobiliti<>).Th<diff<r=c<bnWttnyourtotal
budg<lingoctiviti<>.
...noandyourtotalliabiliti<>i.>yournnworth.Acuhflow
t::?-;, :=.::;:,~
1
sy<t em lor maintaining p~nonal
5tal<m<n~al.o calkdop<"><>J1.i.lincom<ondap<nd~ur<>lat<·
m<nt, i.> o mmmaryofcashr«riptslll\dpo.ym<ntsfOrogiv.n
Anorganiu<l<y>t<m<J!financialr.cord.onddocum<nt>i>th• p<riod.wch ooomonthoroynr.Thi.>rq><>rtprovid<>datoon
foundationof<if<<tiV<moneymanog<m<nt.Thi• •J"t<m.hould yourinromo:mdop<ndingpo.ll<nu.
provido<a><ofo= • •wdl•o>«Urityforfin:rncWdocu..
m<nt.thatm•yh<impouib!<totqlloco.
xiv Walkthrough
JimStewam i• anaccountingmajoratConc:ordiaUni·
"""ity;hetake.fiV<!cou""such"'m~ ne rand ~ xpe<:ts
to graduate i nthre ~ Y"""·
Jim came to the Financ ial
Aid offke forhelp indecidingwhethe rhe •hou ldbor-
..
:~: z,~ney or work pan -t ime . Let's look at his
Residenrialnatu.:J i mlive:~withhispa "' ntsand i sfree
of foodandlx>ardcharg.,...
Potentia/numb<>rofhou"al/omdforpo~rt- tim e work:
Assuming35wl't' ks ina5<hool yurar.dthatJimwill
be unabletoworkforfourweeks.Jim is leftwith31
workweeks. Considering Jim'•grade•areofprimary
~~::~"~"_:.:k~dvise him to work for a maximum of
Potentia/numberofhou"a//ottf'dforfu/1-timesum-
me r "mploym ..nt: Jim w ill have 11 w .... k, (52 le"
35 we e ks) du ri ng the 5U mmer, when he can work
~~~~~:. ~· ::~~~,:: ~~~~!",~~~g~~~~::~~~~
FINANCIAL PLANNING FOR LIFE'S
SITUATIONS offers information that
encourages the learner to take action. This
feature is based on the principle of active
learning; it presents example situations to
prompt learners to apply newly acquired
concepts and make unique financial planning
decisions.
Financial Planning I Tax Credits versus
Calculations
Manype<>pleconfusetaxaedi"-withtaxdedurtions.ls
onebellerthantheother?Ataxcredit,sucha•tuit ion
fel'5o rmedi<alexpensl'5, resu lts inadollar-for-dollar
reductionintheam<lllntoftaxP<owed.Ataxdeduction,
sucha•anRRSPcontribution,reduce sthetaxable
incomeonwhichyourtaxl'5arebased.
All non-refundab le tax credits reduce tax.., payab le
w ith the li mitation that taxe• payable cannot be
reduced below zero. Asidefromcharitabledonations
thattotal morethan$200, politica l donatiomandthe
dividendtaxuedit(whichrequireadd it ion a l p roce-
duraiYicu lations), theamountdaimed ismult ipliedby
15 percenttoarriveatthetaxuedit. For example, if
S100 is•pentontu ition,thenabout S15Ynbedaimed
asad irectreductionoftaJ<1'5($100x0.15)
On theotherhand, adeductionofS100may ormay
notreduce yourtax..,by S15becausethetaxsavings
arising fromthedeductiondependonyour marg inal
taxrate.Notethattaxsaving•aresimply equa l tothe
deduct ionmult ipliedby the margina l taxrate.ThU5, it
muhiplying th~ amount by th~ lowe;! marginal tax rato. with th~ uceytion ofth~ tax credits for
charitabl~ and political contributions and divid~nds, whou difftrent rat~• au applied.
STUDENT WORK has been incorporated
into selected Financial Planning boxes and
I Need $20,000 for My Education.
Should l Borrow or Work Part-time? depicts how former students have approached a
number of decisions relevant to them. These
Jim"syearlygross income i• S6,975 + sg,ooo ~ $15,975.
samples serve to model for the students' peers
Jimwillnothave LJ5eofth~ entireamount . His a nnua l
P"Y--<l~ t of taxes, Qu ~ t>ec Pen•ion Plan, and Employ· how they tackled difficult questions by high-
m ~ nt l nsuranc:epaym ~ nts--i• S 14,48S(atotalof $ 1,490
i• d~ du<t~d according to 2013 rate•) . How~ ver. wh ~ n
he file• his i nc:om~ tax return, he •hou ld receive a
lighting methods of analysis and suggested
r~fund of any taxe• pa id (SS21 of the tota l $1,490
deducted) courses of action.
There are 5tudent loam offered by both th~ fPd ~ ra l
andprovinc:i a l governments;the .., l oan•areofg r &~t~ r
advantagebecau.., theyoff~ rl ower i nter P< t rate• than
the banks and you areon l y r~ quir ~dto pay them back
once yo u graduate. If Jim w~ re to take out a loan
today for S20,000from the Qu ~b ~ c Gov~ rnment"• A i d ~
Fina ndereauxEtudP< program, h~ w il l pay an annua l
i n ter ~ st rate of 3.50 perc ~ nt (afe .gouv. qcca/enl
apr~ sEtude..,tauxlnteret. a•p) . S i ne: ~ h ~ wants to pa y
the loan back in six yea" after graduation, using th ~
prP<m t v a l u ~ formul a he wi ll m ak~ month ly paym ~ nts
J
FINANCIAL PLANNING
CALCULATIONS features approximately
Tax Deductions 100 mathematical applications that the learner
must master. All these calculations are situated
:~~d :.:~\:~e:td~~"~C:i~~xwC:~d~t0~: ~:~l:r~l~a~~~ in decisions that are typical of what learners
ever,makingacomparimnofwhether•pendingona
deductible it em i• better than •pending on an item encounter but may have shied away from due to
thatgeneratl'5taxcredit•requ ire•acarefu l spedfica·
tionofsevera l variabll'5,i nclud ingyourmarginalfed· the numbers behind these operations. The
eral rate,theprovince inwhkhyourl'5ide, therull'5
attributedtothetaxuedit in quest ion, andmon .
Carefu l finandalp lanninghelpoyouusebothtaxued·
procedures illustrated in these calculations
it.andtaxdeductiomtoyourmaximumadvantage .
reinforce concepts introduced in the chapter in
S100TaxDeduction an applied setting. They are also tied to end -of-
Reduces your taxable income by $100. The
chapter questions and exercises.
amount of your tax reduction depends on
yourtaxbrad<et. Your federaltaxeswill be
reducedbyS1S ifyouare inthe15percent
taxbracketandby S22 ifyouare inthe
22percenttaxbrac ket
Walkthrough

ADVICE FROM A PRO is a great

example of distributed expertise and multiple
perspectives. In this box, industry professionals AdvicefromaPro
provide the kind of advice one can take home
and internalize in order to make sense of the Any attempt to Glkulate you r investment return must
include the least exciting, most annoying financial
subje<:t:tan•s.Eventhewordmakesmecringel
informational deluge that all of us face.
Thegovernmentwillget t heirsha re ofyourmoney-
noexceptions. Smart tax planning helps you pay le-;s
tax lega lly. The federa l government im't fooling
around: Those who use illegitimate techn iques to
avoidpayingtaxe'<getsoc:kedwithhigh·pri<edpenal·
t i.-.orjailtime .Payyour tan•sontime
Aroundthefi~toftheyear,youwi ll beg i ntoreceivea
•eri.,.of'i'latement•fromthejobsatwhich you have
wor ked or financial in•titution• where you hold
account.. Thi•i ndude•brokeragef irm•,bank.,mutua l
fund.,andotherintermed iari.,.. Find t he receipt.from
any charitable donation• you've made and proof of
-
anyemployment-re latedexpen..,.youplanonwriting
off. Keep these materials toget her; lrntformswaste
time and money!
You r taxreturnhasseveral5ectionsofwhi<hyouneed
tobeaware . General ly,your incomeshouldbeadded
up, indud inganytrn ..... Figureyou rtaxab leincome,
facto r inaddit ionalaedit•or taxt"S,and writeacheque.
You'...,.jurtpaidyourtiiXf'i!
Fo r thme w itha homeb.,. ine•.,complicated return•,
or•ketchypaperwork,wmeprof"''ionaltaxguidance
i•highly recommended- ,ond.....arthit/ SpendingiDme
moneyonataxprep;nerorCPAm ight..,..mdaunt ing
but wi ll ensurethatyourreturni• fil edaccurately and
rapidly

Therateofinflationvaries.Duringthelate 1950sand early DID YOU KNOW? boxes contain up-to-

:Pic! '1o"' k.<.ow? l960s,theannualinflationratewasinthe l to3percent range.
Canad ianh ouseholdsspentanaverageof Duringthe late1970sandearly1980s,thecostoflivingincreased date facts, figures, and answers to frequently
$75,443 in2012, including $56,000on l0to12percentannually.
goods and services
Morerecently,theannualpriceincreaseformostgoodsand asked questions. They are featured several times
servicesasmeasuredbytheconsumerprice indexhasbeeninthe
SOURCE:r<:inet.cajenj2014/01/29/
statis~cs-<:anada<:anadian-houseOOI<I­
1 to3percentrange.Theconsumtrpri~ index(CPI ), published within each chapter and typically elicit an "a-ha!"
byStatisticsCanada,isameasure oftheaveragechangeinthe
spending.
pricesurbanconsumerspayforafixed"basket"ofgoodsand from the learner. These are not just catchy but
services. For currentCP i information,gotostatcan.gc.ca.
provide well-researched insights that are often
CONSUMER SPENDING Total demand for goods and services in the economy influences
employment opportunities and the potential for income. As consumer purchasing increases, quoted by students in discussion forums.
thefinancialresourcesofcurrentandprospective employeesexpand. 1hissituationimproves
thefinancialconditionofmanyhouseholds.
In contrast, reduced spending causes unemployment, since staff reduction commonly results
from a company's reduced financial resources. The financial hardships of unemployment are a
major concern of business, labour, and government. Retraining programs, income assistance, and
jobservicescanhelppeopleadjwt.

INTEREST RATES In simple terms, interest rates represent the cost of money. Like every -
thingelse,moneyhasaprice.Theforcesofsupplyanddemandinfluenceinterest rates.When
consumersavingandinvestingincreasethe supplyofmoney, interestratestendtodecrease.
However, as consumer, business, government, and foreign borrowing increase the demand for
monev,interestratestendtorise.

CONCEPT CHECKS are a valuable

device to help learners digest conceptual chunks
All other provinces and territories apply a Tax on Income (TONI) system that permits the
within a section before they proceed further into provincetodecideitsowntaxratestobeappliedtotaxableincome, aswellasdifferentnon-
refundable and refundabletaxcredits.
the chapter. These questions also serve to taxableintome The
netamountof.n corne.
refocus the student's attention on the learning afte r al lowable CONCEPT CHECK 3-1
deduct1ons.on wh1Ch
objective that applies to each section. incorneta..srornputed 1. Howshouldyouconsidertaxesinyourfinancialplanning!

employmentintome 2. Whattypesoftaxesdopeoplefrequentlyoverlookwhenmakingfinandaldecisions?
Remuneration re-ceived 3. Whomust fileanincometaxreturn?
f01"persor~al effort

t. - hi"J"R""otio/Sn.i«<lhlnf!W<boitd<><librvr
~ob<ai.,lnfonn.tion o o...!""'"d<vrltop<r.<nuio
J\nat>tioi.Oft.--tluwh.>.. ~. ~"""""""
cmdi!K.>o.<nd,..,.~~ tht.,..... ..,d..-ail
olilf.r<A..OO.....-ln!l<n<i~linancio.J.....-i<n' Wf
2. •..-,.,.;"f-Kc....li_R_CUTr<"t «ononti<
ronddiono (lnr•""'"" doUlll>tion ) ~Th<Fi_ _ l_ ._ ::::·~;::·t:..~~.~:,.C:~\::~==y:~:..
oth<rKt...rr""""""·"'Wdo >Or<.!Wrdun<u=no.m>-
non>.k ror>dllm ~ whol "'"'"'"""'"l""..rontmrnd
w
f'<"pprwOO...,,.vinii<D<I~""""'Tt Wf
) . C<omJ'<'rinfFin4.o..llnrtind"""-Colk<loldwrt;,.,m<nu
andpromo:>tlonailni<><m>00n!rumorv<r>J6nanci>JJ<dlm.
S. R....,""""c"Cn.iirU.;""'UiinjJthtW<boit<fo<lh<C...Jrt
u,;... c.nmo.~<A~d>.(<u«ntnl.<o) or<>lh< r - .Cd,
obuininfu.m>lion ot.m.!j<Minl!>crniilw"lmandlh<O«· FINANCIAL PLANNING ACTIVITIES
vi«<U.~rrr<ot~non<i&llnltlh<rmotr.. o w "l.-
provide an opportunity for students to translate
.....,.. pW.. u..,.otr... (Yw.moroo w....m~ tht w.to .~
ol '""'"'"' t,..ncialln.,~urion > .) C.mpU< tht f< otU< r<
>ndpOlrnlW<>roirwof l,...orlh«< .. ring>pl<n>
learning objectives into research, which in turn
w i .w 'f
1. R ~c..rn. .. ~J>..tUt.U."'&Ilbrarrmcw<r<
feeds into decisions they may be ready to make.
(...& .. 71wi'OwlntUI-U>dotl>rr<>unnt~pmoo;

~~::=~~:;'~~.:::~~
rorn). U<>lr o!Uioffoct.n ll..rl"'mJ&hl«>n<ldrrwl>m
<Ornf"rinni<OOr>U>dbmdiuoi'""""" ..vinS'plon>""d
~iogK<ow>.U. J..0"2-
I.
4. 00r.;ni"fap;.iom-lfi.. n<i<JStnita . Sill~>r=>J
J'<Opkto<kl"'mlnr........,...onduor<Av>riou>l\nandai
" ' vi<n.oudl.,oolm.b&nlin~~o"• murcud.!."onddl<q,.._
wnr~n~~ .ott ....... w l-
a.b i « "'<D ~ I adl..,monrr«nur.a.~f"''""'• "'"' A ''To Do" list includes various procedures,
""'J"ol""""'"""'"'o{"'""'""-..mg."""""'"
monqmukrl~GIC..U>dCSBo. s.oi- s.o 'f
A...Ipl"f~·Wri'"'rSoft""". VWtsol\....,..,.wa,.,
techniques, and sources of information.
roob<alnloform>llon o"'"-'l tll<i<>.lum in>...-..... p<" "'"ai
<mr.pul« P"'S"m' uk<l lor m<lnu.in i n~ • 'h<quln&
>«oYnt.lniocmoti<>n d>ool oY<h rrosrnn•., Mon>.gin~
Ymu Monrr.Mkrooofi Mon.r. <nd Qukkrn nl<rb<
obuinrdonlh<ln«mn. w 5""

"'
xvi Walkthrough

LIFE SITUATION CASES provide

LIFE SITUATION CASE
A Single Father's Tax Situation
Ev.r oinahi•wifiod<ath,EricArmonohasfor«<difficult
p<r><>no.l andfinanci.Jcircmrutanc<>. Hi>jobprovid<>him
withofoirlygoo<linrom<butr«jUirnhimtohin o caKgiv<r
forhi>daugh t•"-•8<'8 ond !O,nnrly20doy>omonth. Thi>
r«JUirnhimtoW<in·homochildeu<5a>'icnth.atronrnm<o
lorg<rortionofhio incom<.Sine<th<Arrn:rnooliV<inosm.U
apartm<nt.thi>orrang<mrnthub«nv.ryinronv.ni<nt
AlthoughEricho>crntodoninv.otm<ntfundforhi>
daught<ro'«<ocationandforhi>rrtium<nt.hohunot50Yght
tosd.ainvntm<nt.th.atoff<rtnb.n<fiu.Ov=ill,h<n«<l>to
loolo at~ ..p<Ct• ofhiotu·ptanningactiviti<>tofind>lrat·
<gi<>th.atwilll>nt><rv<hio curr<ntandfuruufin:rncWnK<ls.
Eric hu u=obl«< tho following informotion for tho cur·
opportunities for the learner to understand
real-life situations that individuals face. These
Tot.olnon·ufundabl<tucm!itomounts
Childc&r<d«<uction
!13J(IO
$6.300
cases allow the student to assume the role of a
Filing>tatu~Hadofhow<hold
consultant who can identify underlying prob-
Questions
I. What or< Eric'• m ojor finonciol con«rm in hi> curunt lems, establish a framework for analysis, clarify
>ituation!
2. lnwhat w.oy>mightEricimprnv<hisln·planningdforu! issues, and propose possible solutions.
3. loErioctypicalofmanyf'«>!'l<inoursocinywithrtgardto
tnplonning!Why,orwhynot!
4. What additionalaction>mightEricinv.>tigat<r<garding
tnaondp<roonalfinanci.alplanning!
S.Calrulat<th<follow:ing:
a)WhatioEric's 2007f<d<raltonbl<inrom<!(R<f<rto
Eihibit3- l,po.g<75)
b)Whatiohio totall007f«<<raltu li.J.bility!Whatishio
ov.~<2007f«<<raltnrot<!
c)WillEricuuiV<atnr<fundor<JW<odditionaltnato
thoful<ralgov<rnm<ntforl007!

THE CONTINUOUS CASE reinforces

the benefits of case-based teaching by linking the CONTINUOUS CASE FOR PART 1

major concepts presented in each of the five

sections in the text. It provides an opportunity to Si n~ ag<2l:>tut ing a car~nod<p<ndanu

identify and analyze a range of personal financial

Sinc<opottionofh<rin<omoioha..doncommWiom,
decisions about several topics in a given section. ::::•::i:~:·~:~';':,o;.:.~~ :::~a:·~
• Establioh op<t><>nalfinoncWplan
Students begin to appreciate the broad connec- • D<vdopobudg<tingsyst<mforop<nding:md ..ving>
inicbudgrt.Duringlanmontho,>h<h.. hadtor<JOttto
uoing h<r cr«<it cud to maU mds m«<. In fact, h<r cr«<it
carddd>t,!1,270, ioh<ronlyliabilityatthiotim<.H<ronly
tions between chapters and sections. oth<t50'.1IT<ofincom<i>olarg<tur<fund.lnthoJ>"'I~>h<
hu alw:oy:su..dtnufund.tolin:me<majorporchua(o
Monthlyincom<
vocotionorfurnitur<)orpo.yotfcr«<itcudd<bt
Livingap<rua
~ ..,.,
1.980

Em<rg<ncyfund
Whil<inuninr>ity, Pomdaj<nldruwork<dpo.rHim< ond
wasnov.r<one<rnodaboutlong·t<rmfinancialplonning
Roth<rthancr<atingobudgrt,>h<us«<h<rchequ<bookand
=~~h·.~~:h~!:ually hod a V<rf low balane<) to
Aft<rcompl<tinguniv.nity,Pom<lob.ganh<rcar«ta>
a >al<>t<pra<ntativ<for a clothingmanufactur<rlocat«<
inMontr<ai.Aft<ron<y<ar, h<r:w~rl>conoi>tof o l995
dJ.evrol<t, otd.vioion..t,o>t<rro,ondoom<dothingond
oth<rp<r><>nalb.longings.with a tot.alvoluoof$6.200
Questions
l. What financial docision• ohould Pamdo b. thinking
aboutatthiopointinh<rlif<!
2. Whatar<><>m<shorH<rrn,int<rrn«<iat<,ondlong·t<rrn
fin:mcialgoilithat Pamolomightwantto<kvdop!
3.How.houldPomda budg<tforfluctuation> inh<rincom<
cous«< hy <ommi»ion ouningo!
4. Al.oumoPamda;f«<<ralturdundi>$1.100.Giv<nh<r
curuntoituation,whatohould>h<dowithth.rdund!
5. ~;:;;~]!:~~~;:ion, what typ< of tax planning
Comprehensive Teaching and Learning Package xvii

COMPREHENSIVE TEACHING AND

LEARNING PACKAGE
McGraw- Hill Connect - is a web-based assignment and assessment platform that gives students COf1l1eCt
the means to better connect with their coursework, with their instructors, and with the
important concepts that they will need to know for success now and in the future. With
Connect, instructors can deliver assignments, quizzes and tests easily online. Students can
practice important skills at their own pace and on their own schedule. With Connect, students
also get 24/7 online access to an eBook- an online edition of the text- to aid them in success-
fully completing their work, wherever and whenever they choose.

LEARNSMART I!II ILEARNSMART"

No two students are alike. Wby should their learning paths be? LearnSmart uses revolutionary
adaptive technology to build a learning experience unique to each student's individual needs. It
starts by identifying the topics a student knows and does not know. As the student progresses,
LearnS mart adapts and adjusts the content based on his or her individual strengths, weaknesses,
and confidence, ensuring that every minute spent studying with LearnSmart is the most efficient
and productive study time possible.

SMARTBOOK i!II ISMARTBDDK -

As the first and only adaptive reading experience, SmartBook is changing the way students
read and learn. SmartBook creates a personalized reading experience by highlighting the
most important concepts a student needs to learn at that moment in time. As a student
engages with SmartBook, the reading experience continuously adapts by highlighting content
based on what each student knows and doesn't know. This ensures that he or she is focused on
the content needed to close specific knowledge gaps, while it simultaneously promotes long-
term learning.

INSTRUCTOR'S RESOURCES AVAILABLE ON CONNECT™

• Instructor's Manual: The Instructor's Manual is a course planning guide with instruc-
tional strategies, course projects, and supplementary resource lists. The Chapter Teach-
ing Materials section of the Instructor's Manual provides a chapter overview, the chapter
objectives with summaries, introductory activities, and detailed lecture outlines with
teaching suggestions. This section also includes concluding activities, ready-to-duplicate
quizzes, supplementary lecture materials and activities, and answers to Concept Checks,
end -of-chapter questions, problems, and cases.
• Computerized Test Bank: Prepared by Glenn Davis of Red River College, the computer-
ized test bank consists of over 1,000 true-false, multiple choice, and essay questions. The
test bank is available in McGraw-Hill's EZ Test software, a user-friendly program for
Windows that enables you to quickly create customized exams. You can sort questions by
format, edit existing questions or add new ones, and scramble questions for multiple
versions of the same test.
• Microsoft® PowerPoint® Presentations: Prepared by Cyndi Hornby of Fanshawe
College, the PowerPoint lecture presentations may be edited and manipulated to fit a
particular course format.
xviii Superior Solutions and Support

SUPERIOR SOLUTIONS AND SUPPORT

The McGraw-Hill Ryerson team is ready to help you assess and integrate any of our products,
technology, and services into your course for optimal teaching and learning performance.
Whether it's helping your students improve their grades, or putting your entire course
online, the McGraw-Hill Ryerson team is here to help you do it. Contact your Learning
Solutions Consultant today to learn how to maximize all of McGraw-Hill Ryerson's resources!
For more information on the latest technology and Learning Solutions offered by McGraw-Hill
Ryerson and its partners, please visit us online: www.mheducation.ca/he/solutions .

McGraw-Hill I Solutions that make a difference.

• IRyerson Technology that fits.

LMS Course Adaptive Lecture Print&

Integration Management Learning Capture Digital
--....J --...J
Acknowledgements xix

ACKNOWLEDGEMENTS
We express our deepest appreciation for the efforts of colleagues, contributors, and students for
giving this textbook its own flavour and character. Thanks also go to the following reviewers
whose constructive suggestions have been incorporated as much as possible. They are:
John Athanasiou, KPMG LLP (Hamilton)
Robert Foster, Fanshawe College
Jason Priest, University of Toronto
Vince Rasa, KPMG LLP (Hamilton)
Barbara Rice, Conestoga College
Kamal Smimou, University of Ontario Institute of Technology
James Waring, Vancouver Island University
We would also like to acknowledge the professional contributions made by McGraw-Hill
Higher Education and McGraw-Hill Ryerson. Thanks go to Kimberley Veevers, Senior Product
Manager; Kamilah Reid-Burrell, Product Developer; Jessica Barnoski, Supervising Editor; and
Erin Moore, Proofreader.
Finally, we look forward to your comments, suggestions, and questions. It is our hope that
this textbook will make a difference in the lives of your students.
Arshad Ahmad
arshad@mcmaster.ca

Jordan Fortino
jordanfortino@gmail.com
The Greatest Speculative Bubble in History?

THE GREATEST SPECULATIVE BUBBLE

IN HISTORY?
Just as we talk about the great crash and Depression of 1929-1939, people will still talk about the
great bubble, crash, and economic crisis of2000-2013 a hundred years from now. In summary,
what is common during both periods is a technological revolution financed by a speculative
bubble that created record debt and illusory expectations of easy and instant wealth.
The previous paragraph was written for a previous edition of this text. However, we now revise
these two comparative periods to 1929-1950 and 2000-2025. The U.S. crisis that started in 2008
evolved into a worldwide mess that still has not totally resolved itself, courtesy of our governments,
central banks, financial institutions, Wall Street, voters, and consumers. All seem determined to
spend above their means indefinitely. Choose your target for blame, but we are in it together.

IT IS NOT CYCLICAL, IT IS STRUCTURAL

What could have been a harmful cyclical financial crisis has turned into a distressing structural
depression referred to as the Great Recession. Political and financial leaders have increased government
and central bank interventions. In the process, they have created dangerous levels of debt and currency
devaluation. Their interventions seem to treat the economic problems as if they were cyclical.
In a cyclical recession, providing access to debt and liquidity can be a good thing. Cheaper
and more abundant money allows firms to clean up their balance sheets, reformulate business
plans, and ultimately generate more revenues.
The current structural change includes a technological revolution spawned by the Internet, a
speculative bubble, significant demographic changes, globalization, and the proliferation of
derivative products. Combined, these factors have created conditions that require extreme
adjustments in our economies and in our standard of living. Economic and investment princi-
ples have not changed, but the context certainly has. Point the finger where you may; as a society
we have not yet adapted to the changes.
To help the reader to better understand what we believe is a continuing period of structural
change, we revisit the "myths" that we outlined in a previous edition.

MYTH #1: STOCKS ALWAYS BEAT BONDS

Although the past forty years have clearly demonstrated that bonds do as well or better than
stocks over many long periods, most investors still believe that stocks are better.
One of the reasons for this includes remuneration for the investment industry, including
banks. Banks simply earn more by selling financial products that include stocks rather than
bonds or money market investments.
Another reason for the preference for stocks is past market performance measures. A study
by Franklin Templeton Institutional (presented at a conference of CFA Montreal) covering 1970
to 2005 showed the following: A Canadian Bond total return index had an annualized return of
9.6%, and Canadian stocks a return of 10.3%. After fees and commissions, that would make
these two assets classes about equal. However, had you invested in a long-term bond index, you
would have outperformed stocks over that time horizon.

MYTH #2: RISK IS VOLATILITY, WHICH CAN BE QUANTIFIED

AND MANAGED
By clinging to statistical measures such as correlation, standard deviation, covariance, and the like,
financial institutions thought they could manage risk quantitatively and continued to increase their
leverage (debt). Two other underlying factors include:
1. A misunderstanding and misuse of the efficient market hypothesis and the Capital Asset
Pricing Model (CAPM), which has been the hallmark of modern portfolio theory. First
The Greatest Speculative Bubble in History? xxi

introduced by Harry Markowitz in 1952, the misinterpretation of his work led to the
definition of risk as volatility of expected returns. We feel that risk involves the chance
that an asset will lose its ability to create future cash flows, and therefore permanently
lose value. Volatility is only the market's expression of changes to the perception of risk.
2. Incredibly irresponsible deregulation, starting with the repeal of the Glass Steagall Act in
1999 and the consequent lack of regulation in derivative and swap markets, which
continue to date.
A newsletter explaining the crisis used the following title: "The Dumbest Smart People in the
World:' The financial industry has recruited physicists, mathematicians, and statisticians at the
expense of principled portfolio managers.
Since the turn of the century, it seems that at least two important questions were ignored.
First, basic insurance and investment principles were overlooked. Notice that if everyone uses
the same risk model based on volatility, it follows that at some point everyone will want to sell at
the same time. Who in this situation will buy? Second, if most financial institutions, investors,
and speculators protect their bonds and other leveraged investment risks with a few insurance
firms who only insure those types of products, how will the insurance firms pay back when
everyone has claims at the same time? This scenario occurred in 2008: firms were not able to pay
back investors and subsequently went bankrupt.

MYTH #3: VALUATION AND FUNDAMENTALS

DON'T MATTER
Over an extended bubble period, the principles of valuation are denounced as old-fashioned
economic tools for ignorant and out-of-date investors. Speculators are busy praising momen-
tum, short-term index weightings, and millisecond algorithm trading.
It is not uncommon that rigorous fundamental analysis and economic fundamentals on the
value of businesses are dismissed during periods of speculative frenzy. Hand in hand, the invest-
ment horizons continue to shrink, even though these horizons do lengthen after the market
collapses.

MYTH #4: SHORT-TERM SOLUTIONS CAN ADD

UP TO ADDRESS LONG-TERM PROBLEMS
It is obvious that technology and globalization have increased the speed of communications. But
the opposite is true with respect to the speed of policy, economic, and financial market reac-
tions: these have become much slower.
One reason for this is the convergence of opinions to sustain the status quo as more people
share more information more rapidly. The liquidity of a market comes not only from its size, but
more importantly, from the diversity of opinions amongst market participants. Crisis scenarios
are postponed again and again with short-term fixes, with information manipulated more
subtly, even though fundamental deterioration is seemingly obvious.
The second reason is the access to and interplay of public and private funds, such as the
trillion-plus social security funds. Add to this government-guaranteed or -sponsored entities,
aggressive central banks, high value speculators, and investors who use derivatives, swaps, and
carry trades, which can artificially create money for speculation. These have the effect of boost-
ing asset prices. We end up in a synthetic and transient state of valuations, postponing the write-
down of the mountains of debt created in the process. This crisis will almost surely end badly.

Using sound investment principles, prudent risk management, and risk avoidance do not
provide a guarantee of success but can help the individual investor. In almost all financial crises
since 1900, cash, Treasury bills, and deposits guaranteed by a major industrialized country have
protected the investor from a loss of principal. More importantly, they have provided an
xxii The Greatest Speculative Bubble in History?

opportunity to benefit from buying devalued assets toward the end of the crisis, when most
people and corporations are selling assets to raise cash. Today, very few in the financial industry
are recommending this strategy.
As a future financial advisor, saver, or investor, the complexity of financial markets is not
about to simplify. This text has been written with great care to keep financial jargon at its mini-
mum, and yet many experts ignore the ideas presented above. Mr. Market can become the Great
Humbler, and investing should continue to be a perpetual learning process. We challenge you to
use a principled approach, one that allows you to sleep well, rather than scrambling to eat well.

Arshad Ahmad
Associate VP, Teaching & Learning and 3M National Teaching Fellow
McMaster University

Paul Dontigny, Jr.

Gestionnaire de portefeuilles
Investissements, PDJ
 Money Management
Strategy: Financial
Statements and Budgeting

Planning Your Tax Strategy

"'-' ''·' '"" ' ·~ '"
Another random document with
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VAPPUNA

Lupasinhan sinulle kirjoittaa, miten täällä maansydämessä

keväätärtä vastaan otan, kertoa kuinka Vappua saapuneeksi
tervehdin.

Pitkä päiväni kului kuten ainakin — vanhaan yksitoikkoiseen

tapaansa. Ennen puolista ummehtuneessa luokkahuoneessa
oppilaitteni kanssa ponnistelin, kansakoulun tietomäärästä
yksityiskohtia nuoriin kalloihin kalkuttelin. Iltapuolen ystäväni
maakauppiaan luona »Rettinkiä» tupruutellen kulutin. Rihkamalla
täytetyssä puotikamarissa ensin vehnäiskahvit, sitten teevedet juotiin
ja sävyisästi siinä »ahvääreistä», kunnan asioista, viimeisistä
sanomalehti-uutisista ja vuodentulotoiveista juteltiin. Rauhallista
tupakkapuhettamme häiritsi ainoastaan puotioven kellon ajottainen
kilinä, saaden kauppamieheni joka kerta vaistomaisesti pystyyn
syöksähtämään ja kamarimme ovessa olevan pienoisen lasireijän
kautta puotiintulijaa tarkastelemaan ja istuutuessaan säännöllisesti
— povitaskujaan taputtelemaan sekä suljetun kassakaapin lukkoja
hypistelemään — — —.

Ja nyt on ilta — on Vapunpäivän ilta!

 Istun puolipimeässä alasvedettyjen uutimien takana, kuunnellen
tulvillaan olevaa jokea, joka koskipaikoissa kohisten
vapaudenlaulujaan hyräilee.

Yksinäni nyt keväänjuhlaa väsyneenä vietän, hämärän tullessa

kahden kesken oraan uupuneen itseni kanssa iloitsen — — —.

Muistuvat mieleeni Vaput vaihtelevat, milloin mitenkin vietetyt,

milloin missäkin seurassa kuluneet —.

Näen kaihoni kaukosilmäisellä katseella miten on pääkaupungissa

Vappu-ilo korkeimmillaan, miten hämärässä valkolakkeja ja
kukkarintaisia vaaleita kevätpukuja kaikkialla parveilee.

Nyt lasiseinäinen Kappeli satojen sähkölamppujen säteillessä

ihmisiä vilisee, puhelusta surisee kuin suunnaton kimalaispesä.
Torvisoiton sävelet lämpöisessä kevätilmassa keinuvat ja soittolavan
edessä katujen kirjava kuulijakunta kihisee. Yli lehdettömien
lehmusten ja vaahterain soitto Operakellarista milloin kasvavana,
milloin heikkenevänä kohti Kappelia kiirii ja keväthämyiset kadut ovat
vaihtelevaa liikettä ja ääntä täynnä — naurunsekaista puhelua,
kavion kalsketta, rattaiden räminää, raitiotievaunujen kellonhelinää,
joka ilmassa väräjää ja soi — — —.

Viereisen luokkahuoneen seinäkello lyö — lyö yksitoista. Kumeasti

suuren tyhjän rakennuksen kuiva hirsiseinä kajahtaa ja kaupungin
äänten humusta herään todellisuuteen — tyhjän koulutalon
kolkkouteen ja yksinäisyyden epäselvään tuskaan.

Nostan uutimeni — sataa!

 Hieno vihmasade, tasaisesti tihkuen, muodostaa pieniä
mutkittelevia virtoja ruuduille. Yhä selvemmin kuuluu harmajasta
usvasta paisuneen joen ääni, tulee huoneeseen tulvan tasainen
kohina — siinä minun ylioppilaslauluni!

Yksin! Mutta — iloitkamme! Onhan Vapunpäivän ilta! Ja

yksinäisyys ja minä päätämme lystiä pitää, kahdenkesken tänä iltana
huvitella! Pois siis yksinäisyyden tuska, pois apeutuva mieli ja
maailman surkeutta sureminen — miksi nurkua!

"Nurkuminen ja tyytymättömyys ovat onnellisuuden pahimmat

viholliset" — opettaa lukukirjamme ja hilpeän pirullisella mielellä
päätän kuulun kirjan neuvoja muistaa — — —. Ja todellakin, miksi
nurkua, onhan kevät käsissä, onhan talven valta murrettu!

Luon taas silmäyksen ulos — ja katso!

Jo on itsepintaisesti pilvinen taivas paikoittain kirkastunut ja

kevätyön hieno hämärä kolkonruman huoneeni ikäänkuin
valoisammaksi saapi, niinkuin suurenemaan ja kohoamaan saattaa
ja minut haltioihini tuntemattomilla toiveillaan nostaa. Saapunut on
Pohjolan kevät, kirkastaen yöni, että näen miltei kirjaa lukea — — —
ja mieleni valkenee, katoaa katkeruus.

Terve sä varhainen kevät, runsaslahjainen, tuhatääninen!

Avaanpa akkunanikin — jo tunnen keväättären hengen

tuulahdukset! Leudoksi muuttunut kosteanlämpöinen tuuli minua
leikkisästi hyväilee, kantaen kosken kohinan milloin kuuluvampana,
milloin heikompana korvaani. Mutta niin se kohina nyt mielestäni soi
kuin heränneen luonnon kiitosvirsi ja säestäjänä toimii sateen
jälkeen yhä harvempaan tippuva räystäs — tip — — tip — — — tip
— — — —.

Vieläkö nurkuisin yksinäisyyttäni! Terve, sä varhainen kevät,

ylistetyt olkoot lahjasi!

Toithan jo minulle kirjorintaisen käen, jonka kaksiäänisen

kukunnan kuuloni kaukaisuudesta eroittaa. Laulaahan minulle
parhaillaan öinen leppälintu säveliään. Ja himmeävarjoiselta
männikkökankaalta puhelee laulurastas:

On kesä liki — on kesä liki!

On kevät jo käsiss' — on kevät jo käsiss'!

Ja hiirenkorvall' — ja hiirenkorvall'

On koivut, on koivut!

Ja totta onkin mitä laulurastas laskettelee. Huojuvathan akkunani

edessä kohta hiirenkorvaiset valkokoivut, nuorteat ja
kevättuoksuiset. Taempana laajenevat tummat toukokyntöiset pellot,
missä elämä kohta on kytevä. Toivorikkaana syksyinen oras jo
kaukaa täysivihreänä loistaa.

Tekee miltei mieli hymyillä, hiljalleen hyräillä — —. Tahdon nauttia

siitä mikä tarjolla on — kevättunteiden sekavasta riemusta, joka
minut valtaa, tuosta salaperäisestä ahdistuksesta, joka sydäntäni
kouristaa siihen aikaan kun luonto herääjä uudelleen syntyy, kun
kaikki nesteet nousua hankkivat ja tuoreena tuoksuu, höyryää maa.

Tarttuu minuunkin, yksinistujaan äänettömään tuo sama

elämänrohkeus, jota käenkukunta uhkuu. Luo mulle lohtua öisen
leppälinnun sävel, lämpöä sydämeeni sytyttää rämeellä viheltävän
viklan liverrys.

Jopa kumminkin kannattanee olla olemassa, elää ja toimia —

vaikka hiljaisuudessa, yksinäänkin!

Jo saatan miltei ylistää sinua, yksinäisyyttä! Lääkkeistä paras olet

sinä väsyneelle, nääntyneelle mielelle. Sinun seurassa opin itseni
paremmin tuntemaan, opin luontoa lähenemään, iäisyyden
käsittämään — — —.

Jo tulevat he — jo tulevat elämänhalu ja toivo luokseni

vierailemaan — — — hiljaisin askelin hämyiseen huoneeseni
hiipivät.

Muutama sadepisara singahtaa taas ruudulleni. Surullisesti

veisaten tuuli kiihtyy, uunintorvissa vaikeroiden huokailee. On
pimennyt taas ja joen heleä hopeavyö tummaksi painuu.
Sopusoinnussa se on harmaahuntuisen taivaan kanssa, joka äsken
vielä oli niin pilvettömän kirkas. Kalpeita sumupilviä lähellä
maanpintaa vaeltaa — täytyy sulkea akkuna — — —.

Hävinneet ovat harvinaiset vieraani — toivo ja elämänhalu.

Lakastunut on äsken puhjennut riemuni heleä kukkanen — ja tuttu
toverini, hämärä surumielisyys valjuna vieressäni istuu. Tyhjää ja
harmajaa kaikki — — — syksy keskellä kirkasta kevättä!

Ääneti on käki, lopettanut on leppälintu laulunsa. Surullisina,

avuttomina huojuvat pisaraoksaiset koivuni, kolkosti tuuli huokailee,
alakuloisia säveliä koski soittelee. Yksitoikkoisesti tippuen räystäs
nyyhkyttää ja pisara pisaralta katoaa rohkeuteni, aste asteelta
elämänhaluni alenee — — —.
 Ainoa toverini, vapauttaan hakeva harmaja sarvijaakko kömpii
pitkin ruutua ylös, aina uudelleen pudoten ja taas ylös yrittäen.
Tuntuu mielestäni kuin olisin itsekin tuollainen sarvijaakko, joka
kiipeilee, kiipeilee — pudotakseen. Kurja kuoriainen, jota olojen luja
lasiruutu vapauteen pääsemästä estää! — — —.
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